When the government announces a range of tax cuts tomorrow, it has pledged to do so in a ‘sustainable’ way. What counts as sustainable, however, is going to be hotly contested – especially in light of this morning’s update from the Office for National Statistics, which saw the UK borrow more than forecast or expected last month. Public sector net borrowing came in at £14.9 billion in October – more than a billion pounds higher than forecast by the Office for Budget Responsibility and £4.4 billion more than was borrowed during the same month last year.
There are two ways to look at the data. The first is to note that while October’s figures were higher than expected, the annual picture is still looking better than forecast, with cumulative government borrowing for the fiscal year coming in almost £17 billion below what was forecast by the OBR in March. This is largely thanks to the record-high taxes that Chancellor Jeremy Hunt will supposedly take an axe to tomorrow. Once again, tax receipts exceeded expectations, totalling £76.9 billion – £4.5 billion more than expected by the OBR and £2.5 billion more than was collected in the same month last year.
That’s the optimistic outlook – and one that allows for loud calls for tax cuts. The other outlook takes note of different data, mainly the UK’s debt servicing payments, which the Chancellor has been concerned about as well (so much so, that he was saying just last month that debt interest payments had taken major tax cuts off the table this year). October’s numbers are no exception: the UK’s debt interest payments hit £7.5 billion – the ‘highest interest payable in any October since monthly records began in April 1997’. This was £2.6 billion more than the OBR had forecast and £1.1 billion more than was paid last year.
It’s a painful reminder of what fast-rising interest rates have done, not just to individual finances, but to the government’s spreadsheets as well. Even so, it’s overspending in the first place – thinking those bills would never catch up with us – that has led to such expensive debt servicing payments.
This raises a wider question about what is really ‘sustainable’ in the coming days. The surprise ‘fiscal headroom’ that Hunt is thought to be working with tomorrow isn’t money found through mass efficiency gains or ‘difficult decisions’ (i.e. cuts) made elsewhere, but through having a slightly smaller (and still sky-high) deficit than was predicted at the start of the year.
Can long-term income tax cuts be funded in this way – not least when the country’s biggest costs (healthcare and pensions) are only surging upwards? And do the tax cuts meet the government’s own criteria, laid out just yesterday, of needing to ‘have controlled inflation and debt’ to start reducing the tax burden? This morning’s ONS update shows that public sector net debt accounts for almost 98 per cent of GDP – ‘at levels last seen in the early 1960s’. It will be a challenge for Hunt, to put it lightly, to balance the first two (new) government pledges to reduce the debt while also cutting tax.
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